Inventors, Entrepreneurs And The Space In Between

Got a hot idea for a new product? You’re not alone. However, hard data on exactly how many products are introduced each year is surprisingly sparse. So far, the best source I’ve found is Mintel’s Global New Product Database.

According to the firm, over 20,000 new products from 50 countries are added each month. Product categories include beauty and personal care, household and home, automotive, clothing, and consumer electronics, among others. It gets complicated though, because other categories that would more typically be defined as services than products – like travel, financial services, and telecommunications – are also included.

But say for a moment the number is accurate. That means 240,000 new products are introduced every year. It has also been estimated that one out of every 1,500 ideas actually becomes a product. If also true, then something like 360 million products are ideated yearly.

Thank God for such a low percentage. What if every idea became a product? It’s estimated that Amazon already has over 320 million products available on its website. Imagine that number doubling in the next year. You’d need one hell of an algorithm just to find anything at all.

Risk as a Critical Filter

In many ways we have supply chain costs to thank for such a low product launch ratio. Mass manufacturing is an expensive proposition. Even a relatively simple product, one without complex electronics or assembly, can have significant upfront development costs. Then you have to commit to the quantities it takes to justify production. Then there’s packaging, shipping, inventory and all the other incidentals. It’s an expensive gamble. You need scale.

Then, even if you’re capable and committed to making a product, you’ve got to find a way to sell it. You can either go direct or wholesale. Each option has its own set of costs. To go direct, you’ve got to build a channel, and that takes marketing. Go wholesale and you’ve got selling expense and the costs of supporting your distributors.

Inventor or Entrepreneur?

In general, inventors want to focus on product creation. They’re masters at identifying problems and creating products that solve them. Assuming they’ve solved the right problem their products can be successful. But their tolerance of, and ability to conquer risk is a big part of what separates them from entrepreneurs.

Inventors can mitigate risk by licensing their idea to someone else.

Entrepreneurs are focused on execution. They have the determination not just to create a product, but to create a business around it and get it to the finish line. There’s lots of debate about which is the best way to build a better mousetrap.

Inventors can mitigate risk by licensing their idea to someone else. But they’ll also get a relatively small percentage of the pie. Five to 15 percent of profit is typical. If a product sells for $30, profit is 30 percent, and the royalty is 10 percent, the inventor would earn 90 cents on each sale.

Entrepreneurs prefer to tackle risk head-on. Some bootstrap, but if you’re making a tangible product (versus writing software or offering a service), you’ll more likely need funding. Getting investment requires that you solve the big chicken-and-egg dilemma. It’s hard to get investment without revenue and even harder to get revenue without investment.

The Demand Side of the Curve

It’s estimated that somewhere between 1-5 percent of products that launch actually become successful. There is a very real risk that people won’t want what you’ve gambled your intellect, integrity, sweat, and money to create. If you sell your product directly and it sucks, people just won’t buy it. While going wholesale could potentially expose your product to a lot larger audience, you’ve got a much longer tail.

At retail, merchandising teams are standing at the gates. A big part of their job is separating solid from suck. Making it into their “solid” category is no guarantee of success. If the product doesn’t appeal to consumers, it still won’t sell.

Even if a retailer likes your product, chances are good they won’t buy it directly from you. It’s difficult to become a “tier one” vendor. There is significant energy involved in onboarding new suppliers. They have to be set up in the system, a buyer must be assigned, and a bunch of other hoops must be jumped.

At retail, merchandising teams are standing at the gates. A big part of their job is separating solid from suck.

Much more often, entrepreneurs with new products are relegated to a distributor who has their own set of opinions and motivations.

Whether you’re working directly with a retailer or through a middleman, they command a significant portion of the profit. Take the route of an entrepreneur and you’re gambling, with all the incremental risk, that you can beat what a licensing deal might offer.

But new tools have surfaced that can help entrepreneurs solve the puzzle.

Marketplaces

Online marketplaces like eBay and Amazon sell goods from multiple suppliers. But unlike a typical vendor-retailer relationship, they don’t buy the product and mark it up. They just make it available to a very large audience and take a percentage of each sale. They can afford a smaller cut because they bypass much of the supply-chain risk.

Because it all happens online, their onboarding cost is lower and they can offer many more products. Their algorithms separate the wheat from the chaff. As a result, marketplaces flatten the barrier to entry but don’t necessarily reduce the risk for an entrepreneur.

Crowdfunded Innovation

Crowdfunding platforms like Kickstarter and Indiegogo have created another new distribution channel. They allow inventors to test demand for their product, effectively pre-selling the product. If the project is successful, they are obligated to build and ship their product. If not, they get to fail fast, inexpensively.

“Crowdfunding can dramatically de-risk the launch of a new product,” says Christopher Hawker, the CEO of Trident Design, LLC, “because it allows the creator to get market validation much sooner in the development process, when the product is still in prototype phase, before major investments are made in tooling, production and inventory.”

Trident Design is probably best known for helping Ryan Grepper design his invention, the Coolest Cooler, which was one of the most successful crowdfunding products of all time, generating over $13 million in backing.

Trident’s newest product, the Couchlet is a simple USB hub that squeezes between sofa cushions to put outlets in a convenient location for charging mobile devices. It’s currently being crowdfunded on Indiegogo, and according to Chris, “Trident was able to conceive the product, create a 3D printed prototype and build a campaign within three weeks.” One week after launching, they had 2,500 backers and over $50,000 in contributions, giving them both the market validation and capital they needed to proceed.

Execution Is Vital

For all its benefits, problems can occur with crowdfunding. First, you end up with a lot of accidental entrepreneurs. They’re inventors who are now faced with having to execute quickly and at scale. That not only means actually manufacturing the product, but also managing all the ancillary stuff like packaging, documentation, shipping and fulfillment. As a result, many successfully funded projects hit roadblocks that create dissatisfaction.

The other problem is that crowdfunding doesn’t provide a very good filter for “suck.” The creators of most crowdfunded hardware products have no more than plans and a prototype. Little testing is done prior to the campaign. As a result, you get products that don’t live up to their promise.

Crowdfunding doesn’t provide a very good filter for “suck.”

Consider the Ouya video game console. One of the top campaigns on Kickstarter, it raised over $8.5 million from more than 60,000 backers. It promised inexpensive, Android-powered console gaming. Not only did Ouya deal with the execution issues outlined above, but also significant problems with product quality.

First they aggravated a large portion of their base when units started hitting retail shelves before crowdfunding backers received their purchases. Then there were issues with sticky buttons on the console’s controllers. Unforeseen costs started piling up. The company secured more than $25 million in venture funding, but it still wasn’t enough. Ouya is now available for sale.

Which Is Better?

Both sides have their pitfalls. Inventors have to design their products, secure IP protection, and build a working prototype before someone will license it. Then it’s a crap shoot. They hope and pray a licensor will make their product a success.

Entrepreneurs must do all the same upfront legwork, but then figure out their own production and distribution strategies. They take the incremental risk because they believe they can deliver a better outcome.

Even though e-commerce marketplaces and crowdfunding have the potential to level the playing field, they come with their own set of uncertainties. But now, another new technology is coming into play that can help both inventors and entrepreneurs.

Digital Manufacturing Blurs the Line

With 3D printing, products can be manufactured on demand, which really flattens the barrier to entry. An individual can have an idea, design a product and make it available for sale, quickly and inexpensively. Their designs can be offered as digital files, or as physical products. Consumers who own 3D printers can download the files to make products themselves. Consumers who can’t or don’t want to print themselves can go online and have products made and shipped to their home, office, or a local store.

Retailers like Amazon, Walmart, Sears, Staples, Lowe’s and others are rapidly adopting the technology. For them, the benefits are becoming clear. Customers get what they want, where they want and when they want, while almost all of the supply chain cost is eliminated, or at least postponed until after the sale is made.

For idea people, 3D printing creates all kinds of new opportunities. Inventors can license their products and make them available online – either as a digital download or as a physical product. They can also quickly iterate their inventions or build entire lines of products, for different uses, available in many sizes and colors. If they happen to own 3D printing equipment, they can even choose if and when they want to be the manufacturer. If the product is successful they can switch to mass production.

Most importantly, they can make all of these decisions on a product-by-product basis, sometimes being the inventor, sometimes the entrepreneur, and sometimes operating in the space between.